Private placements of equity and accessibility of bank loans

PLOS ONE RESEARCH ARTICLE Private placements of equity and accessibility of bank loans Xin Song1, Chao Liu ID2*, Zijie Ding1, Chenchen Huang3, Qiongyao Zhang ID4 1 University of Shanghai for Science and Technology, Shanghai, China, 2 Nanjing University of Finance & Economics, Nanjing, China, 3 Frostburg State University, Frostburg, MD, United States of America, 4 Robert Morris University, Moon Township, PA, United States of America * a1111111111 a1111111111 a1111111111 a1111111111 a1111111111 OPEN ACCESS Citation: Song X, Liu C, Ding Z, Huang C, Zhang Q (2023) Private placements of equity and accessibility of bank loans. PLoS ONE 18(3): e0281510. https://doi.org/10.1371/journal. pone.0281510 Editor: Nemer Badwan, Al-Zaytoonah University for Science and Technology, STATE OF PALESTINE Received: October 21, 2022 Abstract This study investigates the changes in quantity and cost of bank loans after a private placement of common stocks by A-share listed companies in China from 2011 to 2021. This research is derived from the signaling theory and is based on a difference-in-difference design. Through propensity score matching, the sample comprises companies that placed equity privately in the experiment group and companies that did not place equity privately in the control group. We find evidence that the increase in bank loans slowed down, and the cost of bank loans increased after the private placement. The signaling effect of private placements is robust to various additional tests. Further analysis indicates that when stateowned enterprises place equity privately, their access to bank loans is not affected. When institutional investors participate in the private placement, the company’s access to bank credit does not go through significant changes. In addition, private placements by companies located in regions with higher levels of marketization of the financial market do not reduce the cost of bank loans. Accepted: January 25, 2023 Published: March 15, 2023 Copyright: © 2023 Song et al. This is an open access article distributed under the terms of the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original author and source are credited. Data Availability Statement: Private placement data from Wind data (https://www.wind.com.cn/ newsite/default.html). Other financial data is from the CSMAR database (https://www.gtarsc.com/). These data are tri-party data and others who wish to access them will need to visit the above website and purchase an account to access the data. And we have provided the data used in this essay. Funding: This work was partially supported by the Start-up fund for MOE (Ministry of Education in China) Project of Humanities and Social Sciences (Project No.20YJC790118). 1. Introduction Equity private placements refer to listed companies selling a block of stocks privately to a limited number of investors. Private placements of common stocks are the prevailing venue of raising additional capital after the Initial Public Offering (IPO) by listed companies in China. For example, the total amount raised by private placements by A-share listed companies exceeded 1.5 trillion CNY in 2016, which accounted for more than 80% of funds raised by Seasoned Equity Offerings (SEOs) and was more than ten times what was raised by IPOs in the same year. Chinese companies use private equity placements to circumvent the regulatory restrictions on other forms of equity financing. For example, companies that plan to go IPOs or issue rights in SEOs must be a going concern with a track record of positive earnings. Private placements are less prohibitive and do not have those restrictions [1]. The monitoring effect theory posits that private places with big shareholders’ participation reduce the constraint of financing so that corporate innovations are encouraged [2]. The benefits of a private placement are primarily its ability to raise equity for companies. The downside of private placements is their tendency to be abused by large shareholders because of reduced regulatory requirements. PLOS ONE | https://doi.org/10.1371/journal.pone.0281510 March 15, 2023 1 / 16 PLOS ONE Competing interests: NO authors have competing interests. Private placements and bank loans Listed companies in China often have a highly concentrated equity ownership structure. Protections for small shareholders are considered weak. Current literature on private placements focuses on the interest conflicts between big and small shareholders. For example, some studies investigate the schemes employed by big shareholders in funneling interests out of the company (e.g., [1,3]). We are interested in the impacts of private placements on creditors, including banks. In the Chinese financial market, banks often cannot access the necessary information to judge the credit risks of companies. Banks often depend on external signals [4]. Private placements provide a window into examining banks’ credit risk management mechanisms. We select China’s A-share listed companies as the example in this study to investigate the relationship between private placements and bank loans. We find that private placements significantly affect the availability and costs of bank loans. Private placements offered at heavily (lightly) discounted prices see the more(less) significant restriction of bank loans. Private placements with institutional investors included are not followed by changes in bank loans granted to the company. We also discover that the signaling effect of a private placement is attenuated if the issuing company is a State-Owned Enterprise (SOE) or the company is located in a region with a developed financial market. When bank credit becomes tightened after a private placement, the company will likely use more commercial credit. This paper makes a few potential contributions to the private placement literature. This paper documents the negative signaling effect of private placements on bank loans in China. Our analysis of the negative signal provides an additional opportunity to understand the interest competition between equity investors and creditors. Large shareholders will abuse their position to infringe on the interests of small shareholders without the monitoring of institutional investors and an effective financial market, which calls into question the effectiveness of the current investor protection mechanism put in place regarding approvals of private placements in China. The remainder of the paper is organized as follows. Section 2 summarizes related literature and develops the research hypotheses. Section 3 discusses the research design. Results and analysis are reported in Section 4. Section 5 presents the results of robustness tests, and finally, Section 6 concludes the paper with a summary of our main findings. 2. Literature review and hypothesis development 2.1 Private placements and bank loans [5] point out th (...truncated)